Two IPOs That Merit Review

Angie's List and Yelp, both BTC review sites, are now making the leap to public ownership. Angie's List went public yesterday, ending its first day up 25% from its offering price. Yelp has filed papers for a public offering in the near future.

At a high level, these sites are remarkably similar, arguably even a bit competitive. Dive into the business models, however, and they couldn't be more different.

Angie's List has a model that defies conventional wisdom: call it a B2C paid community review site. Get this model right and you build something with enormous power: a massive army of reviewers who have a vested interest in honestly and accurately reviewing local businesses because they are paying for the privilege of accessing that same base of reviews. You also get an engaged community, something that advertisers (at least well-reviewed advertisers) are anxious to tap. Indeed, Angie's List reported advertising revenue of $34 million last year, versus subscription revenue of $25 million. The most remarkable feat of all: avoiding real or perceived conflicts of interest while selling subscription access to objective reviews then selling advertising around those reviews. Spend just a few seconds on the Angie's List site and you will see the intense focus on transparency and objectivity. No effort has been spared to make both businesses and consumers feel they are getting good value, trusted information and fair treatment. It's a delicate business model, but Angie's List has been perfecting it for over a decade.

Contrast Angie's List to Yelp, which has a free access model in which access to business reviews are free, and revenues are generated from advertising. Yelp has unquestionably impressive metrics: over 22 million reviews, and 61 million users for starters.

But beyond the differences in business models, Yelp is a distinctly different business. And while its free access model afforded fast growth, it has paid a price for being free. As Yelp became increasingly influential among consumers, it started attracting false and biased reviews from businesses seeking to improve their own ratings or damage the ratings of competitors. Yelp responded with a series of opaque algorithms designed to root out fake reviews, but that ended up doing real damage to Yelp's perceived integrity among both consumers and businesses. Even worse, Yelp showed little sympathy to businesses that claimed that demonstrably false reviews were ruining their businesses. That's an especially big issue because Yelp depends on such businesses for advertising revenue. This lack of transparency and perceived conflicts of interest came to a head when a number of businesses accused Yelp of offering improved ratings to those that advertised. It was a PR disaster, but one caused as much by the business model as specific business actions.

And that's another place where you see huge contrasts: company leadership. Angie's List is run by Angie Hicks, who exudes Midwestern values and integrity, and is completely aware that while her mission is to inform and empower consumers, her business model can also recognize and reward good service providers, and that works to everyone's benefit.

Contrast that persona with Josh Stoppleman, founder of Yelp, who fashions himself as something of a consumer advocate, with businesses of all kinds inherently the bad guys. When the New York Times asked him about a business trying to get Yelp to remove a bad review for a dish it didn't even serve, Stoppleman's nuanced reply was, "why believe the business owner?" After several such interviews, Yelp's PR team finally got Stoppleman locked in a closet for the good of the IPO.

It's difficult to say with certainty which business model is stronger. The Angie's List approach has a lot going for it, but it's a hard road to build a business like this, making the company even more impressive. At the same time, Yelp is to date a success story in its own right, but like so many other large review sites, is fighting issues and complications on almost every front. The need for consumer reviews is clearly large and durable, but we are a long way from a firm conclusion as to how they should be collected and presented.